Latin America: Open Banking’s Uneven Rollout

The technology is gaining traction, but lack of knowledge and uncertainties about security are still barriers to implementation across Latin America.

Financial markets are evolving rapidly thanks to new technology, data collection and processing, and digital-product creation. In Latin America, however, the so-called open banking or open finance movement is advancing at different speeds throughout the region, with some countries developing faster than others.

Open banking is a result of European Parliament resolutions created to bring competition and efficiency, as well as more choice and higher security, to consumers and online-payment providers around the world. Countries such as Singapore, India, the UK, Hong Kong, Japan and Canada have already adopted open banking. In theory, Latin America should be on the way to open finance as well, creating a possible bridge for financial inclusion.

“The system was created to reduce the big banks’ concentration and centralize data in one platform,” says Álvaro Bandeira, independent financial consultant.

So far, this effort has met mixed success in Brazil—the regional leader. A system of central bank supervision, regulation and authorization of participating institutions is in place. The technology is working well, and large and medium-sized Brazilian banks are required to join the open finance initiative. However, one key component is missing: the customer.

“The adoption of open finance is minimal,” says Bandeira. “There are 130 million people with bank accounts, and fewer than 4 million people have shared information to open finance.” The problem, he explains, is that consumers have been burned by newfangled finance systems in the past. “Users are not so confident with this technology, due to security problems we have faced in other technologies.”

He cites Pix, an instant, free electronic payment method offered by the Central Bank of Brazil, beginning in late 2020, to individuals and legal entities. Pix works 24 hours, seven days a week. According to cybersecurity firm PSafe, fraud attempts involving Pix have increased 1,191% in the first half of this year compared to the same period in 2021. Those alarming figures provoke trust problems in the banking system not only in Brazil but also in many countries across the region.

“Latin America’s financial history is not very favorable to banking,” says Jaime Valdívia, chief economist at Galapagos Capital, a global investment company. He recalls some unpopular government initiatives in the 1980s to suppress money withdrawals by users in Argentina, Mexico and Brazil. As a result, the generation now in their 40s is wary of banking innovations.

An additional barrier: mobile theft has increased in the majority of the region’s countries. In Mexico, for example, in 2020-2021 it rose 106% over the previous two years, according to the National Telecommunications Association, Anatel. Mobile financial apps are easy to use for making transfers, so it is much easier to assault people than to rob a bank.

Both Valdívia and Bandeira acknowledge the security problems inherent in open finance, but they believe it needs a better communication campaign to show users its advantages. “It would be important to show how beneficial it will be for the client, as through a single platform it is possible to have full visibility of all banking accounts and choose the best product offers,” says Bandeira.

Regional fintech companies are striving to make the benefits of open finance more tangible. Among them is Uruguay’s Prometeo, working with 10 countries across the region to build application programming interfaces with various business partners. With more than 50 active clients, it does not deny the security problems that banks have to improve in order to win costumer confidence. Still, the company is very busy, according to Prometeo co-CEO and co-founder Ximena Aleman.

“We have been growing faster in the last 18 months, and our revenues increased 10 times in this period,” Aleman says, citing plans to increase revenue three times in the next 12 months. Prometeo also plans to hire 20% to 30% more people. Although the company is growing, and business is better than expected, there are some barriers to implementing open finance technology on the continent, Aleman explains: “Countries are still looking for their standards.” Peru, Mexico, Colombia and Uruguay are best equipped to adopt the technology, he adds, and as a result, “banks from those countries have the most advanced negotiations with [Prometeo].”

For the players involved, it is clear how beneficial it is for customers to find the best financial offers using a single platform—and also for fintechs, as they will access to users’ information and increase their potential client base. However, as many countries are still evaluating how to adopt it, it remains to be seen whether implementation will be mandatory.

Giorgio Trettenero Castro, secretary general of the Latin American Federation of Banks (Felaban), says open finance is a natural path for the financial system to follow.

“We would say that it is a global trend imposed by technology,” he says. “Data management and its collection under suitable rules and technologies are among the sources of modern financial development.”

For Trettenero, the heterogeneity of open finance is normal, given that in Latin America there are different degrees of economic development. The countries each have differences in the level of income per capita, size of the economy, public finances and relationship with foreign trade. Similarly, countries exhibit differences between the degree of financial development, depth of financial systems and the evolution of domestic capital markets.

“It must be said that the differentiation between services and between entities is important, because the entities do not seek to resemble each other,” Trettenero adds. “On the contrary, everyone wishes to be different from their competitor, to present their best arguments, to be of service and to win the market.”

As open finance adoption remains free in each country, Banco Cuscatlan of El Salvador finds its way with it. As the technology still has no regulation in the country, agreements are made to benefit all the parties involved, although the open finance principle does not foresee any mutual agreement.

Although Cuscatlan plays a big role in El Salvador, and the bank purchased Scotiabank’s operations in the country at the beginning of 2020, the bank does not offer all services required by its clients. It might not be difficult to create these services; but instead, the bank chooses to find partners with suitable financial solutions and to continually search for business partners to further match its clients’ needs.

“We have found very good partners to increase our services; and at the same time, we have provided our partners with new clients,” explains José Eduardo Luna Roshardt, executive general director of Banco Cuscatlan.

Luna views the initiative optimistically, as preparation for the future. Once open finance is established, the bank will be ready to open its platform with the right partners to benefit customers, fintechs and banks.

“I believe open finance will be helpful to promote growth strategies—and, as a result, increase the number of accounts in the country,” says Luna. “There is a way to include people in the financial system, and the future is digital.”